Why IR35 reforms moving to the private sector may be positive

Going against the grain, but bear with me on this…I think there are some very real positives if this goes ahead. Ie current expectations that April 2017 changes to public sector IR35 operation start to apply to the private sector at some point (possibly from April 2019) too.

Motives more aligned with the client

An issue with current IR35 enquiries, is that the end client typically has no real interest in it. They don’t care either way, as they have nothing to gain or lose. They may inadvertently say something that “drops the contractor in it”, eg when describing working practices.

Also, long before it gets to that stage, they’re not overly bothered in ensuring the contract or working practices are IR35 friendly. So you have one party wanting it to be outside (you), one party wanting it to be inside (HMRC), and a largely independent client that could help or hinder the arguments of either party.

This would all change if the end client became responsible for the decision, and surely this is a positive thing for the contractor. Going forwards the end client is more likely to work with the contractor, against HMRC, two vs one. Where the end client has something to lose, they’re going to take far more care ensuring contracts and working practices are IR35 friendly, and that they don’t say something daft in an enquiry.

More time, less of a surprise

The public sector had these rule changes thrust on them with very short notice. Nobody knew how to react. This lead to a knee jerk reaction with many (slightly irrationally, and incorrectly) deciding every single contract was inside IR35.

This won’t be the case with the private sector. They’ll have time to:
– carefully consider their options,
– liaise with legal experts around contracts/working practices,
– liaise with insurers and come up with a package for in case HMRC disagree,
– liaise with contractors about how best to proceed.

The private sector won’t be ambushed in a surprise attack like the public sector was.

Risk completely taken away from the contractor

Whilst many contractors wouldn’t like the higher taxes of being inside IR35, for many it’s the not knowing that’s the worst thing. They can trade happily for years, paying what they think is the correct taxes as they believe they’re outside, then way down the line HMRC raise an enquiry. If that goes against the contractor, they can suddenly have to find huge amounts of extra taxes to pay HMRC, from money they’ve already spent.

There are insurers who currently offer to cover some/all of the extra taxes…but going forwards it simply won’t be a risk on the contractor at all. You can sleep soundly, knowing that if things were wrong, it’s the end client that would potentially lose out, not you.

The “losers”

Yes, there will be some contractors who previously treated themselves as outside IR35 (rightly or wrongly), and will now find their clients insisting they’re inside IR35. They would lose out financially, suffering the higher taxes of an employee. Many will then give up their companies and either operate via an umbrella, or as permanent PAYE employees. However, I believe the numbers of these may be more modest than some doom-mongers are predicting. Also these will likely be the type of workers that annoy those who consider themselves “proper contractors”, and realistically if ever challenged on their old practices would have likely failed an IR35 enquiry anyway.

End result

Hopefully the modest number of those “losers” above will be sufficient to make HMRC relatively happy that they’ve “won”, even though I imagine they’ll be disappointed at how low that number is. They’ve then also made it harder for them to challenge other cases as now the clients have motives nicely aligned with the contractor. Plus it would be big corporates with highly paid solicitors they were challenging, rather than the little guy.

End clients will drift towards having two tiers of contractors. Those who are outside IR35, and those who operate via an umbrella or are encouraged to go onto the payroll. The client will need to make sure any in between are shuffled one way or the other and treated appropriately. Everyone will know where they stand, and things will settle into a new equilibrium.

If HMRC do proceed to roll out the same rules to the private sector, will it be far worse than I’m making out? Interested in hearing other people’s views.